Contracts--Unconscionability
Under the "procedural" test (1st part of 2 part test), K is unconscionabile if...
(1) procedural test: the PROCESS of the contract included unequal bargaining power, lack of meaningful choice, improper process of the sale. (HIGH STANDARD) Ex: K is obscurely worded or certain clauses are buried in fine print where contracting party is unlikely to even discover it.
Under the "substantive" test (2nd part of 2 part test), K is unconscionabile if...
(2) substantive test (affects the act substance of the K): the actual terms of the contract are oppressive or go against the grain of business (goes beyond just price terms; shocking to conscience)
Normally a party is bound to the terms of a contract which he signs but if the provisions of a contract are so grossly unfair as to shock the conscience of the court, the judge may decline to enforce the offending terms, or the entire contract. Examples of these unfair contracts (which judges have weapons against) are?
1) Adhesion/ Standard Form Contracts 2) unconscionable K or term
If there's a clause in the K that's being challenged as unconscionable, will the court strike down the whole K?
A clause in a written K may not be enforced if only the clause as opposed to entire K, is being challenged and the clause is unconscionable.
What is an example of a contract that is unconscionable?
A typical example of an unconscionable contract is where one party is an experienced dealer in a type of business, while the other party is an average consumer. Suppose that the business dealer requires the consumer to sign a contract. Within the contract, they have buried very complicated, technical language that most people wouldn't understand or recognize. The business dealer used very small font and inserted the clause in a way that would purposefully mislead the consumer into signing on unfair terms. In this case, the contract might be declared unconscionable due to the unequal bargaining power between the parties, and the fact that one party used their knowledge and experience to take advantage of the other. If the court finds the contract unconscionable, it will be declared void and unenforceable.
What is an unconscionable contract?
An unconscionable contract is one that is so one-sided that it is unfair to one party and therefore unenforceable under law. It is a type of contract that leaves one party with no real, meaningful choice, usually due to major differences in bargaining power between the parties.
What is the doctrine of unconscionability?
Doctrine of Unconscionability: The idea that a contract may be unenforceable because it is shockingly unfair.
When the court finds unconscionability, what options do they have? What powers do they have at their discretion?
If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may: 1) refuse to enforce the contract, or 2) it may enforce the remainder of the contract without the unconscionable clause, or 3) it may so limit the application of any unconscionable clause as to avoid any unconscionable result.
Generally, what is remedy for a contract found by the court to be unconscionable?
In a lawsuit, if the court finds a contract to be unconscionable, they will typically declare the contract to be void. No damages award or specific performance will be issued, but instead the parties will be released from their contract obligations.
What is an adhesion K?
Most business contracts in use today are probably "standardized." They consist of a large number of non-negotiated pre-drafted terms put together by one party, with room for negotiation as to only a few aspects of the deal (e.g., price and quantity).
Can a K that is merely unequal be "unconscionable" and therefore, unenforceable?
No, a contract that is merely inequitable is not unenforceable.
Are "termination without cause" provisions (i.e., termination at-will) unconsionable on its face (per se)?
No, termination without cause provisions are not per se unconscionable. (Piantes v. Pepperidge Farm, Inc)
To find unconscionability, is it necessary to find that the K is both procedurally (unfair surprise) and substantively (one-sidedness) unconscionable?
No. Generally, a determination of unconscionability requires a showing that the contract was both procedurally and substantively unconscionable when made, BUT there may be exceptional cases where a provision of the contract is so outrageous as to warrant holding it unenforceable on the ground of substantive unconscionability alone. Some courts have concluded that to be unenforceable, a contract must be both procedurally and substantively unconscionable, BUT most authorities have recognized that sometimes substantive unconscionability, without more, can render an agreement unenforceable. Indeed, the courts of Hawai'i have recognized that, under certain circumstances, an impermissibly one-sided agreement may be unconscionable even if there is no unfair surprise.
Is an unconscionable contract the same as an illegal contract? If not, what's the difference?
No. An unconscionable contract is not the same as an illegal contract. An illegal contract is one that is against the law because the subject matter of the contract is illegal. An example of this is a contract to smuggle drugs into the country. In comparison, an unconscionable contract may not be illegal in terms of subject matter, but instead is unenforceable due to the circumstances in which the contract was entered into by the parties. In other words, a perfectly legal contract might be considered unconscionable based on the way that one party obtained the other's signature (e.g., taking advantage of the other party's inexperience by getting them to sign a K they dont even understand).
What are some questions that should be asked when examining the procedural unconscionability of the K or clause?
Procedural Unconscionability Prong: Examine the Bargaining Process: • Is there unfair surprise, unequal bargaining power, the lack of meaningful choice in the transaction? • Consider the relative education and sophistication of the parties, the form of the contract, whether important and surprising terms are contained in the find print. • Consider the adhesionary quality of the bargain.
What are some questions that should be asked when examining the substantive unconscionability of the K or clause?
Substantive Unconscionability Prong: Examine the Terms of the Contract: • Are they oppressive and one-sided? • Do they deviate from the reasonable expectations of parties or from industry standards? • Do they shock the conscience of the court?
What are the basic characteristic of most unconscionable contracts?
The basic characteristic of most unconscionable contracts is that one party signed the contract under situations involving 1) pressure 2) lack of information or 3) being misled.
Is the question of unconscionability one of fact (for jury) or one of law (for judge)?
The issue of unconscionability is one of law for the court, and the test is to be made as of the time the contract was made.
The unconscionability of an agreement is evaluated at what point in time?
The unconscionability of an agreement is evaluated at the time the agreement was executed.
What is the two-part test for unconscionability?
two part test for unconscionability--Generally, a K is unconscionable if it is both: (1) procedurally unconscionable (unfair surprise) i.e., one party did not have full and adequate knowledge of the circumstances surrounding the K (HIGH STANDARD) (2) substantively unconscionable i.e., one-sidedness, terms are oppressive, gross disparity of consideration, results in an economic situation that is unjustly disproportionate, etc.
Basically, a K is unconscionable if its the type of K that...
unconscionable if it was the type of K that 1) no man in his senses and not under delusion would make on the one hand, and 2) no honest and fair man would accept on the other.
In sum, 4 takeaways for unconscionable K...
• Determines whether some or all of contract is enforceable/unenforceable. • Determined by judge. • Viewed at time of formation. • Focuses on oppression and unfair surprise to one party.
Disadvantages of Adhesion/ Standard Form Contracts
• They offer the means by which one party may impose its will upon another unwilling or even unwitting party. • The standardized contract may be used by an enterprise with such disproportionately strong economic power that it can dictate its terms to the weaker party. • There may be no opportunity to bargain over terms at all; the standardized contract is often a take-it-or-leave-it proposition in which the only alternatives are adherence or out-right rejection. • Standardized contracts are often used by a party who has had the advantage of time and expert advice in preparing it while the other party may have no real opportunity to scrutinize, and often no real means to understand it. This may be compounded by the use of fine print and obfuscating clauses.
Advantages of Adhesion/ Standard Form Contracts
• They take advantage of the lessons of experience and enable a judicial interpretation of one contract to serve an as interpretation of all contracts; • They reduce uncertainty and save time and trouble; • The simply planning and administration and make superior drafting skills more widely available; and • They make risks calculable and increase that real security which is the necessary basis of initiative and the assumption of foreseeable risk.
